Some people prefer to work on their own terms and be entrepreneurs or freelancers or contractors, and others, like myself, enjoy the work benefits provided by working for an employer. One such benefit that many employers provide is life insurance. Is employee life insurance enough, though?
When I first started in my career, I was pretty excited to have life insurance through work provided by my employer. Then I took a perusal through my employee benefits package and realized that the life insurance paid out by my employer in the event of my untimely death was $60,000.
At first, I thought that was a LOT as a 20-something year old. Wow, nice perk! Then as financial responsibilities got added on, I had a sinking feeling and realized it’s probably not enough.
According to a study by PolicyMe, 53% of Canadians who have life insurance from their employer, and don’t have other life insurance coverage, are between the ages 30 and 50 years old.
Related: End of Life Planning Checklist in Canada
Sure, statistics can be skewed. The people polled might have been single with no dependents.
But in any case, that statistic was quite shocking to me. I’m not sure what other employer’s life insurance payouts are, but to me $60,000 is not enough if you have a $600,000 mortgage and you are the primary breadwinner, and you have two children under 5, and you don’t have a huge cash cushion to cover expenses for a year or two.
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Is Work Life Insurance Enough?
Is employee life insurance enough?
Work life insurance is also known as group life insurance. According to Investopedia, group life insurance is usually inexpensive or free (your employer pays the premiums), and is usually offered by an employer for its members. Group life insurance is cancelled when you no longer work for the company (so it is only active when you are an active member).
It is definitely a great perk to have since it is part of the benefits package. According to Policy Me, the life insurance benefit provided by employers is usually 1-2x your annual salary. The average annual salary is around $54,000 in Canada, so typically $54,000 to $102,000 is paid out in the event of your untimely death.
Funeral costs in Canada can vary anywhere from $1000 to $12,000.
Work life insurance is definitely is not sufficient for standalone life insurance coverage for most employed Canadians.
When Do YOu Need Life Insurance?
It’s true that not everyone needs life insurance. I had mortgage life insurance before when my mortgage was $600K (gulp). It did give me peace of mind should I have died then my partner at the time wouldn’t have been on the hook for such a large mortgage. I don’t have term life insurance now, except the group life insurance through my workplace (which definitely isn’t as robust as term life insurance as mentioned above).
Who needs life insurance? Essentially, you should get life insurance if:
- You have dependents and your debts and liabilities (e.g. ginormous Canadian mortgage and car payments) are large and you do not have the assets to pay it off
- If anyone (your aging parents, your children, your SAHP – stay at home parent- spouse) depends on you (and the income and assets you bring monthly) for financial support and without you around, it would be a huge financial burden
Many people with young families generally should get term life insurance because usually, at this time in your life, you will have a large mortgage and young dependents.
As your mortgage shrinks and your children become less dependent, the likelihood of you needing life insurance decreases.
If you’re not sure if you need life insurance, PolicyMe has a great free quiz you can take that will ask you questions about your family’s lifestyle, your financial commitments, and your family’s savings, expenses, and income. If you don’t need life insurance, PolicyMe will tell you so. You do have to enter your email to receive the answer.
Essentially, if you have zero dependents, and are single, and do not have a mortgage (or has a mortgage whereby your financial assets are larger than your liabilities) you likely don’t need life insurance.
How Much Life Insurance Do I Need in Canada?
So if you have realized that you may need to top up your work life insurance with life insurance that provides more financial coverage, how much life insurance does one actually need in Canada.
Some people calculate the amount of life insurance you need as a multiple of your salary, for example, 7-10x your annual salary. However, I think it is more prudent to calculate the amount of life insurance you need as part of your current and future living expenses. How much do you spend annually for the basic life expenses, including basic expenses such as:
- Rent or mortgage (including things like home insurance too)
- Food costs
Related: Home Insurance in Vancouver (How to Save Money)
In addition, you could factor in future expenses such as education for your children if your income were to be lost. In Canada, we are fortunate to have health care coverage so this expense doesn’t have to be covered.
To find a precise number of how much term life insurance you would need in Canada, this fun calculator by the Financial Consumer Agency of Canada can help you calculate how much term life insurance you would need.
Here’s what the calculator of “How Much Life Insurance Do I Need” looks like:
The assumption is that the house that you currently live in is liquidated though, so if you do not count on selling the house or home you live in, you will need more.
For example, I did a rough arbitrary calculation of a:
- $600,000 mortgage balance
- $13,000 funeral and estate settlement costs
- $48,000 annual living expenses
- $60,000 insurance payout
- $0 in other assets
- $0 in spouses income
- Expected 10 years of expenses needed
And with a $0 asset for house (e.g. to not sell the house in the event of death), the life insurance policy amount you would need is around $1,000,000.
It decreases to around $400,000 if I list the house asset as $630,000 (and it is sold).
As an alternative you can also do the aforementioned PolicyMe quiz and find out how much you need.
This is what it looks like:
PolicyMe has a new calculator where you can just input the information and you will find out how much life insurance you need (or whether you even need life insurance), and you don’t have to input your email to receive the answer.
Try out PolicyMe’s free life insurance calculator here.
How Much Does Term Life Insurance Cost
How much does $500,000 for a 10 year term cost? Well it depends on a number of factors, including your gender, your age, whether you smoke etc.
For example, here is a chart from PolicyMe of the approximate costs. If you are a man in your 30’s for a 10 year $500,000 policy it is under $25 a month. For a woman, it is even more economical, in your 30’s it is under $16 a month for a 10 year $500,000 life insurance policy.
As you can see, term life insurance is more economical than something like whole life insurance, and it isn’t that much of an added cost, for peace of mind and adequate coverage that work life insurance benefits just doesn’t provide.
Hope this helps answer your question of whether employee life insurance is enough.
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GYM is a 30 something millennial interested in achieving financial freedom through disciplined saving, dividend and ETF investing, and living a minimalist lifestyle. Before you go, check out my recommendations page of financial tools I use to save and invest money. Don’t forget to subscribe for blog updates, a free dividend yield spreadsheet, and the free Young Money Bootcamp eCourse.